Respite for gold investors as metal enjoys strong 2014

23 Jul, 2014

Gold investors are enjoying some respite in 2014 after a long period of falling prices, with the precious metal emerging as one of the year’s best plays to date.

Since the start of the year to 11 July, the price of bullion has firmed by 11% to nearly $1,339 per ounce. Silver, which typically mirrors the fortunes of gold, has also enjoyed strong gains, moving 10% higher to $20.75 per ounce. In contrast, global equities, as measured by the MSCI AC World index, have risen 6%.

The sea change represents a marked switch of luck for beleaguered investors who have suffered substantial losses over recent years. Nick Moore, commodity strategist for BlackRock’s natural resources team, noted that in the first half of last year, the gold price tumbled by 26% as record outflows from physically backed gold exchange-traded funds (ETFs) took their toll.

He said: ‘We estimate that ETF outflows in January to June 2013 were a record 607 tonnes. In January to June 2014, outflows have been significantly lower at just 41 tonnes.’

Some experts believe the rebound is a result of the gold price being driven once again by more fundamental themes. A cheap US dollar, geopolitical tensions in the Middle East, rising jewellery demand, declining supply and resurgence in central bank buying have all been noted as contributors to the price hike.

In terms of the latter factor, the World Gold Council (WGC) estimated that over the first three months of 2014, central bank buying was 122 tonnes, which, if annualised, would be the second highest buying in nearly 50 years.

In addition, the Indian budget required to be passed by 31 July could see a cut in the gold import duty and relaxation on its import/export rules. The WCG estimate that gold easing measures could add 130 tonnes to Indian gold demand in 2014, taking total demand up towards a near record 1,000 tonnes. Global demand for jewellery, the most important demand driver, totalled 571 tonnes in the first three months of 2014, marking the best annual start since 2005.

Recently, however, both silver and gold highlighted their fragility and volatile nature, with bullion closing below the $1,300 mark on 15 July, following the testimony of US Federal Reserve chair Janet Yellen before Congress. While stating that monetary policy had to remain loose for the time being, Yellen warned that further improvements in the economy could lead to earlier rate hikes.

Carsten Menke, commodities research analyst at Bank Julius Baer, said: ‘Against this backdrop, the gold market should face headwinds rather than tailwinds from US monetary policy – barring an unexpected downturn of the economy. For gold to move sustainably higher, the fundamental backdrop would need to change, eg, investment demand would have to pick up markedly due to broader economic or financial market risks.’

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